Over the past several years, low-interest rates have made Certificates of Deposit a less than popular investment tool. The low returns and slow growth have proven particularly troublesome for some investors. The rate hike in December could bolster CD returns slightly, however they probably will not climb as quickly as some investors would prefer. If you do want to include CD’s in your investment mix, here are a few things to keep in mind so that you don’t make common investor mistakes.
- Prepare for rate hikes – Locking in a CD yield right before a rate hike could also lock you into lower returns. While it is uncertain if banks rates will respond immediately to rate hikes, when considering what has happened in the past, there is potential that higher yields might be triggered when and if a rate hike occurs. Being vigilant in studying the market could mean higher future returns.
- Think carefully about long-term CD’s – Given the fact that rate hikes are a possibility, committing to the current rates for a 4 or 5-year CD could prove very costly. In addition to under earning for many years to come, locking into a long-term CD, which often has significant early withdrawal penalties, may not allow you to move into a better option if it becomes available,
- Don’t put all your eggs in one basket – If you decide to include CD’s in your investment mix, be sure to include a range of maturity dates. This offers you a regular supply of maturing CD’s that can be reinvested at higher terms (or different investment tools) as interest rates rise.
- Consider other options – CD’s are often chosen as investment vehicles because they are safe. However, safe is not always best. Given current the low returns on CD’s, it might be better to put your money into a higher yield investment with a little more risk than to tie your money up in a long-term CD that will not produce over the long-haul.
- Don’t roll over – Allowing your CD to roll over automatically upon maturation is not a good idea. Instead we suggest examining your options. Perhaps that might mean another CD, but it could also mean a different investment vehicle.
Now might not be the best time to add a CD to your portfolio, but if you do choose this investment option, consider your next steps very carefully. Better still, we recommend talking to a trusted fee-only financial advisor who can help you determine the best place for your hard-earned money.